Zee Entertainment Q3 profit before tax slips 37% as ad revenues dip

The advertising revenue for the quarter came in at Rs 1,230.8 crore, down 15.8% YoY

Zee Entertainment (Zee) posted a 37 per cent year-on-year (YoY) decline in profit before tax (PBT) to Rs 510.8 crore for the third 

quarter (Q3) of the current financial year (FY20), as revenue dipped 5.5 per cent to Rs 2,048.7 crore. 

The company also issued clarifications on the related-party transactions, which led to three directors resigning from its board during the quarter. Its auditor Deloitte, however, declined to comment on the matter.  The advertising revenue for the quarter came in at Rs 1,230.8 crore, down 15.8 per cent YoY; the domestic advertising revenue declined 15.7 per cent. The international ad revenue came in at Rs 73.8 crore. The subscription revenue, however, grew 15.4 per cent to Rs 713.7 crore in Q3FY20, riding primarily on last February's new tariff order (NTO)-induced changes in subscription patterns. Zee's India subscription revenue grew 21.7 per cent to Rs 631 crore.

The earnings before interest, tax, depreciation and amortisation (Ebitda) declined during the quarter to Rs 565.8 crore, a dip of 25 per cent year-on-year. The Ebitda margin, thus plunged to 27.6 per cent from 34.8 per cent a year back, even as the company cut down on advertising and publicity expenses. Apart from lower revenues, the fall in Ebitda can also be attributed to a rise in operating, employee and other expenses.

The headline operational numbers though were ahead of consensus estimates. As per Bloomberg, analysts had pegged revenues at Rs 1,960 crore and Ebitda at Rs 547.8 crore. One reason is that brokerages had already lowered their estimates in anticipation of a weak quarterly performance.

"Zee’s Q3FY20 operating performance would be disappointing. We expect a sharp 14 per cent year-on-year (YoY) decline in advertisement revenues, significant underperformance versus industry growth rate which may remain flattish. We expect a 630 basis point YoY decline in EBITDA margin to 28.6 percent," Kotak Securities had recently.

Zee's managing director and CEO Punit Goenka admitted that while the third quarter is normally a strong growth period for the company, the tough macro-economic environment led to a decline in its ad revenues. He, however, claimed that the 'worst phase' was behind them and that they would start seeing an improvement from the next quarter.

Meanwhile, Goenka noted that the proposed changes in the February tariff order by the Telecom Regulatory Authority of India (TRAI) are being challenged in court and that the company expects to navigate any regulatory changes in an efficient manner.

"Despite the slowdown, we continue to make investments in businesses where we see potential for growth....We are preparing for the launch of two more channels over the next few months. We also continue to invest in original content for ZEE5, to create a rich content library that will make it a really compelling offering for consumers. These investments will help us grow ahead of the industry once this transient slowdown phase has passed," Goenka elaborated.

On the other hand, Zee also clarified on the related party transactions that had led to three directors of the company resigning from the board during the quarter.

Zee had a fixed deposit with a bank of Rs 200 crore, which the bank had unilaterally adjusted (according to the company) during the previous quarter against dues to certain related parties. The company claimed that subsequently the related parties have refunded the said amount to the company along with interest. The company's audit committee and its board have approved the setting off of the amounts received from these related parties with the aforesaid fixed deposit. Zee said that it is in the process of completing the communication with the bank on the matter.

Zee's auditor Deloitte Haskins & Sells, however, noted that due to non-availability of relevant information (including lien of the fixed deposit) or agreement with the bank for set off of the amounts for its review, it was unable to comment on the accounting done by the company of the set-off of the fixed deposit against the amounts received from related parties. Deloitte, also noted that except for the possible effects of the above matter, it noted no other irregularities in accounting.

Zee also noted that in an earlier year it had given an inter-corporate deposit (ICD) aggregating Rs 150 crore. On account of delays in recovery of the amount, the ICD was assigned to certain related parties, to secure payment of Rs 170.6 crore (including accrued interest up to the date of assignment). However, owing to further delays in receiving payment from these related parties, the amount has been provided for and disclosed as 'exceptional item' during the quarter ended September 30, 2019 and the nine months ended December 31, 2019. Zee claimed it has received interest on the ICD till March 2019.

The company also noted that as on December 31, 2019, it has trade receivables aggregating Rs 750.3 crore from two customers, which include amounts that are long overdue. The company's management has agreed on a revised plan with these customers which involved recovering the amounts over a period of 12 to 24 months. Accordingly, the management has considered the aforesaid amounts as 'good of recovery'. As per Ind AS 109, it has provided Rs 37.6 crore as expected credit loss towards time value of money on account of delayed collection.

At the net level, even as total tax outgo fell by nearly 35 per cent, the profit after tax for Q3 came in at Rs 349.4 crore, a decline of 37.9 per cent over Rs 562.4 crore reported in the year ago quarter. It was also lower than Bloomberg estimate (adjusted profit) of Rs 391 crore.

Zee's promoters had sold 16.5 per cent stake in the company during the quarter to repay loan obligations. Post the sale, the promoter ownership is down to 5 per cent.